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Capital Economics sees gold price rising to $2,000 in coming months, but sticks to its bearish year-end target

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(Kitco News) - Safe-haven demand could push gold prices back to $2,000 an ounce in the short term; however, the precious metal faces some difficult challenges through the rest of the year, according to Capital Economics.

In a report published Tuesday, the British research firm said that Russia's invasion of Ukraine could support gold prices in the near term. Yet the firm sees gold falling to $1,600 an ounce by the end of the year.

"Gold has been the pick of the bunch among safe haven, maybe because currencies and the U.S. Treasuries have been more affected by investors' sharp reassessment of the expected speed of the tightening cycle in the U.S. For that reason, gold might continue to be investors' safe haven of choice," said Kieran Tompkins, assistant economist at Capital Economics and the author of the firm's latest gold outlook.

Kieran reiterated the firm's stance that when the crisis in Eastern Europe is resolved, rising interest rates will once again be a major headwind for gold. However, Kieran also noted that it is too soon to determine how the invasion of Ukraine has impacted global markets and supply chains.

"If sanctions and shortages significantly disrupt activity, central banks could take a softer approach to tackling inflation than is priced into markets. Indeed, part of the large rise in real yields in January has reversed recently. Alternatively, it also feasible in the current environment of high inflation that central banks become more hawkish due to ongoing worries about second-round effects, particularly in the U.S., which is more isolated from the fallout than Europe," he said.

The Russian central bank's gold holdings and the struggling ruble

Kieran also noted that investors need to pay attention to central bank flows in the gold market. Monday, the Russian central bank said that it would start buying gold in the open market; however, Kieran said that it is just as likely that Russia will start selling its gold.

"Western sanctions on the CBR have isolated a large chunk of its reserves held at other central banks that are now out of the CBR's reach. However, according to its annual report, the entirety of its gold reserves, valued at over $130bn, are held in the country. As such, the central bank could use that stockpile as leverage to raise foreign exchange to provide liquidity to financial markets," he said in the report.

"Looking through this cocktail of factors, we suspect that the price will rise to over $2,000 per ounce in the coming months on the back of safe-haven demand. But potential sales by the CBR and the impact on central banks' tightening cycles make the picture murkier," he added. "We think they should determine the extent of the downside that we expect. For now, our forecast is that the price will end the year at $1,600 per."

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